Opalesque Industry Update - Divergent influences of economic variables characterized January 2011, with increasing evidence of mounting inflationary pressures contributing the declines across emerging market equities, while improving corporate earnings and consumer data contributed to gains across developed market equities. Hedge funds posted gains for the month of January, with the HFRI Fund Weighted Composite Index gaining +0.29% for the month, with most significant contributions from Event Driven and Relative Value strategies. A combination of civil unrest in Egypt and higher reserve requirements at Chinese banks contributed to weakness across Asian and Middle East equity markets. US rates rose as the yield curve steepened on improving consumer data, while the US dollar declined against most European currencies. Commodities, notably energy and agriculturals, were generally higher for the month, with the notable exception of gold and silver, which declined.

Event Driven strategies had the most significant positive contribution to index performance, with the HFRI Event Driven (Total) Index posting a gain of +1.96% with contributions from all ED substrategies. The HFRI ED: Distressed/Restructuring Index posted a gain of +1.25%, with idiosyncratic contribution from exposures across US, European and global emerging markets. Stable credit markets, continued improvements in the M&A environment and developed equity market gains contributed to a gain of +0.74% for the HFRI ED: Merger Arbitrage Index.

Continuing on gains of the past seven months, the HFRI Relative Value (Total) Index posted a gain of +1.04% for January with positive contributions from Fixed Income sub-strategies offsetting weakness in Yield Alternative and Volatility strategies. Fixed income strategies benefitted from stable credit market environment and were well positioned via market hedges for the modest increase in yields which occurred in the month. The HFRI RV: Fixed Income - Convertible Arbitrage Index and the HFRI RVA: Multi-Strategy Index gained +1.50% and +1.57%, respectively, with additional contributions from both Asset Backed and FI: Corporate exposure. Yield Alternatives posted a decline of -0.93% for the month on weakness in real estate exposure, while Volatility strategies also detracted from index performance for the month.

The HFRI Equity Hedge (Total) Index posted a gain of +0.34% as continued improvement in US corporate earnings and consumer data were offset by inflationary concerns and civil unrest in emerging markets. Significant contributions to performance came from Technology/Healthcare, Market Neutral and Fundamental Value exposures. The HFRI EH: Technology/Healthcare Index posted a gain of +1.47% on continued earnings improvement, while the quantitative, factor-based constituents of the HFRI EH: Equity Market Neutral Index gained +0.71%. Short Biased and Energy/Basic Materials funds posted partially offsetting declines of -1.47 and -0.39%, respectively.

Macro strategies detracted from industry-wide gains for the month, with the HFRI Macro (Total) Index posting a loss of -0.63%, as gains in discretionary strategies offset weakness in systematic, trend-following macro strategies. Commodity: Energy, Metals, Currency and short-term trending models all contributed to Macro losses for the month, with the HFRI Macro: Systematic Diversified Index posting a loss of -1.11% for the month. Partially offsetting this weakness, Macro Discretionary and Commodity: Agricultural strategies contributed to gains as US yields rose with a curve steepening and soft commodities posted gains for the month.

The HFRI Fund of Hedge Funds Index posted a decline of -0.27%, while the HFRI Emerging Markets Index was modestly negative declining -0.02% for the month, with the positive contributions from fund exposure in Russia/Eastern Europe offset by losses in the Middle East, Emerging Asia and Latin America.